Paying founders and staff at a nonprofit

"Nonprofit" describes what happens to profits, not whether people can be paid. A charity can pay a fair salary to its founder, its executive director and its staff. What it cannot do is let its earnings flow to insiders, which the tax law calls inurement, or pay anyone more than their work is worth. The rules below are how you stay on the right side of that line.

Reasonable compensation

The Instructions for Form 1023 define reasonable compensation as the amount that would ordinarily be paid for like services by like organizations under like circumstances, as of the date the arrangement is made.

Compensation means the whole package. For Form 1023 purposes it includes salary or wages, deferred compensation, retirement benefits, fringe benefits (such as a vehicle, meals, lodging, educational benefits, low-interest loans and personal use of the organization's property) and bonuses. A modest salary plus a car, a housing allowance and a large bonus is judged as one total.

Compare with similarly situated organizations. The instructions describe these as tax-exempt or taxable organizations of comparable size, purpose and resources, with adjustments for geography that you document. Keep the sources of your comparable pay data in your permanent records. See nonprofit recordkeeping.

Who counts as an insider

Section 4958 of the Internal Revenue Code taxes excess benefit transactions between a 501(c)(3) or 501(c)(4) organization and a disqualified person: anyone who was in a position to exercise substantial influence over the organization at any time in the five years before the transaction, plus their family members and entities they control by more than 35%.

The regulations treat these people as having substantial influence:

• voting members of the board,
• presidents, chief executive officers and chief operating officers, whatever their title,
• treasurers and chief financial officers, whatever their title.

A founder who sits on the board or runs the organization is a disqualified person.

The taxes. If a disqualified person receives more than fair value, the excess is an "excess benefit." The disqualified person owes a 25% tax on it, and a 200% tax if it is not corrected within the taxable period. An organization manager who knowingly participated owes 10% of the excess benefit, capped at $20,000 per transaction, unless the participation was not willful and was due to reasonable cause. Excess compensation can also put the organization's exemption at risk. See private benefit and excess benefit.

The rebuttable presumption, step by step

Treasury Regulation 53.4958-6 gives boards a process. If you follow it, pay is presumed reasonable, and the IRS can overcome that only with enough contrary evidence to rebut your comparability data.

1. Approval in advance by an authorized body without conflicts. The board, or a committee permitted by state law to act for it, approves the arrangement before it takes effect. Every member who votes must be free of a conflict: not the person being paid or their family member, not their subordinate, not someone whose own pay they approve, with no material financial interest affected, and not part of a "you approve mine, I approve yours" trade.
2. Reliance on appropriate comparability data. The board gets and relies on data showing what similar organizations pay for similar services. For organizations with annual gross receipts (including contributions) under $1 million, data on compensation paid by three comparable organizations in the same or similar communities for similar services is enough. You may use the average of the three prior years' gross receipts to test the $1 million figure.
3. Concurrent documentation. The written records must show the terms approved and the date, who was present and who voted, the comparability data and how it was obtained, and what any conflicted member did. If the board sets pay outside the range of its data, it records why. Records count as concurrent if prepared before the later of the next meeting or 60 days after the final action, and the board approves them within a reasonable time afterward.

Form 990, Part VI, line 15 asks whether the process for setting pay for your top management official and other officers included independent review, comparability data and contemporaneous documentation. Following the three steps lets you answer "Yes."

Employees vs. independent contractors

The IRS uses the common-law rules, which look at three categories of evidence:

• Behavioral: does the organization control, or have the right to control, what the worker does and how?
• Financial: does the organization control the business side of the job, such as how the worker is paid, whether expenses are reimbursed and who provides tools?
• Type of relationship: are there written contracts or employee-type benefits, will the relationship continue, and is the work a key part of what the organization does?

No single factor decides it. A program director who works set hours, under supervision, using the organization's equipment, is likely an employee even if both sides would prefer a contract. If the answer remains unclear, either the organization or the worker can file Form SS-8 to ask the IRS to determine the worker's status.

Employees bring payroll duties: withholding, employment tax deposits, Forms W-2 and quarterly returns. Publication 15 covers them. Contractors receive a Form 1099 when payments meet the reporting threshold in that form's current instructions.

Volunteers and expense reimbursements

Volunteers are unpaid by definition. Publication 526 says a volunteer cannot deduct the value of their time or services. They may be able to deduct unreimbursed out-of-pocket costs directly connected with the service, such as gas for driving to the volunteer site, or a standard 14 cents per mile.

Reimburse expenses through an accountable plan. For employees, Publication 15 says an accountable plan requires that the expenses were incurred while performing services, that the employee substantiates them within a reasonable time, and that any excess advance is returned within a reasonable time. Amounts paid under an accountable plan are not wages. Payments that do not meet these rules, such as a flat monthly "allowance" with no receipts, are treated as paid under a nonaccountable plan, and those are wages subject to withholding and employment taxes. Use the same receipt-based approach for volunteers.

A regular payment to a "volunteer" that is not tied to documented expenses deserves a second look. It may be compensation, and the worker may be an employee under the common-law rules.

How Form 990 reports compensation

Organizations filing the full Form 990 list people in Part VII, Section A. The 2025 instructions set these thresholds, measured by reportable compensation from the organization and related organizations:

The Form 1023 instructions use a similar idea: "highest compensated" employees or contractors are those paid over $100,000. For which annual return you file, see annual filing requirements or our sister site's guide to which Form 990 to file.

Founders who also sit on the board

Step out of your own pay decisions. The IRS sample conflict of interest policy says a voting director who is paid by the organization may not vote on their own compensation, though they may give the committee information.

Expect to lose "independent" status. On Form 990, Part VI, a director who is paid as an officer or employee is not independent. If your board has three members and one is the paid founder, only two can vote on that pay, and both must be free of conflicts. Adding independent directors makes the presumption process workable. See nonprofit board duties.

501Nonprofit.com is a private company, not the IRS. This page is general information, not legal or tax advice for your organization. Example organizations and figures are hypothetical.